Entering text into the input field will update the search result below

Facebook: Long-Term Winner But Short-Term Headwinds

Librarian Capital profile picture
Librarian Capital


  • FB’s ad revenues are by nature cyclical, grew significantly more slowly in Q1, was flat year-on-year in April and may shrink for full-year 2020.
  • With "investments" continuing to drive up costs, if revenues were to be  flat for 2020, then EBIT would shrink by more than 40% year-on-year.
  • However, FB faces no survival risk from COVID-19, its business is getting stronger, and earnings will likely recover to at least 2019 levels by 2021.
  • There is a meaningful chance of a low-teens annualised return over the next 5 years with a re-rating; even without, returns will be around 10%.
  • At $204.71, FB is a unique asset priced at similar multiples as other large cap companies with less growth potential. We reiterate our Buy rating.


Since we initiated a Buy rating on Facebook (FB) last March, shares have returned 24%, ahead of Alphabet (GOOG) and far outperforming the S&P 500:

Facebook Share Price vs. Alphabet & S&P 500 (Since 01-Mar)

NB. Librarian Capital (as "Blue Sky Capital" initiated a Buy at $171.26 on 06-Mar-19.

Source: Yahoo Finance (01-May-20).

This article re-evaluates the investment case in light of COVID-19 and 20Q1 results last week.

Buy Case Recap

Our original Buy case was based on FB being capable of grow at a 15-20% EPS CAGR after 2019, with a revenue CAGR of 15-20% driven by growth in the number of users, the number of ads per user and revenue per ad, and margins stabilizing or even improving after 2019. Valuation was attractive with a “real” Free Cash Flow yield of about 3%, comparable with quality large caps with less growth.

With COVID-19 impacting FB's inherently cyclical ad revenues at present, we believe the key questions in our investment case are:

  • Does FB face any survival risk in a prolonged lockdown and recession?
  • Will FB’s business suffer any structural damage during the lockdown?
  • What will FB’s earnings look like when the recession is eventually over?
  • Are FB shares still attractively priced relative to its post-recession earnings?

We answer each of these questions in turn below.

No Survival Risk

FB clearly does not face any survival risk, given its relative revenue resilience, high margins and high net cash.

20Q1 results last Wednesday showed some impact from COVID-19, with revenues growing "only" 17.6% year-on-year, costs and expenses growing 35.2% (excluding the FTC fine last year) due to headcount growing 28%, EBIT shrinking 6.7% and EPS shrinking 9.4%:

FB Results – Group Key Items (20Q1)

Source: FB company filings.


This article was written by

Librarian Capital profile picture
We are no longer publishing new content on Seeking Alpha. To get in touch, use the website or Twitter account on our profile, as comments and messages on this site are no longer checked regularly. Articles published under our name on Seeking Alpha were personal opinions, based on information believed to be correct at the time of writing, but not updated. Librarian Capital is an independent third party that published articles on Seeking Alpha on an ad hoc basis, and we have had no contractual relationship with Seeking Alpha beyond the terms and conditions under which those articles were published.

Analyst’s Disclosure: I am/we are long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (4)

I am an FB shareholder and I also believe in FB's long term prospects.
However, when I saw Q1 numbers, I saw weaknesses (I know they're temporary, because of this current pandemic situations). Compared to Q1 2019 (excluding one time legal expense in Q1 2019):
- Operating margin is down, 42% vs 33%. This is the lowest quarterly margin FB has ever recorded. Going forward (at least for Q2 and perhaps Q3), this margin will stay low as the revenue is flat y-o-y but expenses grow by approx 30%.
- Net income is down, $5.4 billion vs $4.9 billion
- EPS is down, $1.89 vs $1.71
Considering all those, why is FB current stock price higher than the same time last year? I am just thinking, perhaps at present FB stock price is getting a little ahead of itself and due for a bit of correction?
Librarian Capital profile picture

Thank you for posting your numbers. Most of them are the same as the ones I have put into my "FB Results – Group Key Items (20Q1)" table above.

I can see your logic, but trying to think about today's share price by comparing it with one from an older period may not be the best way (it's called "anchoring"). For one thing, both prices may have undevalued the company (or overvalued). I think you should from your own view on the intrinsic value of the business instead.
ohlawd profile picture
Facebook was our top pick during the market turmoil. With the rally post earnings, on a relative value basis, we like other names more. But more recently (as of last weeks rally) preferring cash, T bonds, and bitcoin (and Square under $55).

On a growth basis versus other FANG names, WhatsApp and Instagram are the most undervalued ecosystems. When looking at Instagram vs Youtube, Instagram has double the ARPU, and a higher take rate from no ad-sharing with content creators. Facebook wants to WhatsApp to be like WeChat, which is a runway any investor can get behind.

Instagram has pushed out an update that auto-archives all Instagram Live videos straight to IGTV. Instagram is continuing to create incredible synergies within their own platform to drive incredible engagement numbers.

Instagram will go down in history as the best M&A of all time.

We think by 2023 Instagram will be worth $600 billion with accelerating ARPU growth from 2021 to 2023.

We are long Facebook Jan 2021 $245 calls, Jan 2022 strike $310 calls, and shares.
Librarian Capital profile picture
Thank you for posting your thoughts, @ohlawd

With respect, a lot of what you wrote seem fanciful. The entire Facebook market cap is currently $600bn (and Alphabet's is $900bn), and it is unlikely Instagram will reach the same kind of numbers even 3 years from now - however, as a Facebook shareholder, I would love to be wrong.

Buying T-bonds and Bitcoin are also likely to be unwise.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

About META

SymbolLast Price% Chg
Market Cap
Yield (TTM)
Rev Growth (YoY)
Short Interest
Prev. Close
Compare to Peers

More on META

Related Stocks

SymbolLast Price% Chg
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.